Note 5—Income Taxes

Income (loss) from continuing operations before taxes and income tax provision (benefit) on income (loss) from continuing operations consists of the following:


	Year ended
	June 30, 2013			July 1, 2012		July 3, 2011
	(In thousands)
Income (loss) from continuing operations before taxes:
Domestic	$	(6,122	)	$	15,366	$	7,443
Foreign		1,221			1,760		587

Total	$	(4,901	)	$	17,126	$	8,030

Income tax provision (benefit):
Current:
Federal	$	—		$	355	$	(107	)
State		72			247		56
Puerto Rico		—			—		216
Foreign		428			572		(142	)

Total		500			1,174		23

Deferred:
Federal		(2,620	)		4,102		1,670
State		(76	)		495		4,861
Puerto Rico		—			—		307

Total		(2,696	)		4,597		6,838

Total income tax provision (benefit) on income (loss) from continuing operations	$	(2,196	)	$	5,771	$	6,861

In the year ended July 3, 2011, the income tax provision (benefit) attributable to continuing operations and discontinued operations, included in the consolidated statements of operations was $6,861 and $143, respectively. For all other periods, there was no impact related to discontinued operations.

The effective income tax rate on our continuing operations differs from the federal statutory income tax rate as follows:


	Year ended
	June 30, 2013			July 1, 2012			July 3, 2011
Federal statutory income tax expense (benefit) rate		35.0	%		35.0	%		35.0	%
Puerto Rico taxes		—			—			6.5
State income taxes, net of federal benefit		0.1			1.3			4.9
Valuation allowance- state credits, net of federal benefit		(7.4	)		3.0			55.7
Foreign taxes		(0.3	)		(0.3	)		(3.7	)
Federal research and development credit		25.2			(1.1	)		(6.9	)
Non deductible expenses		(4.1	)		—			—
Other		(3.7	)		(4.2	)		(6.0	)

Effective income tax rate on continuing operations		44.8	%		33.7	%		85.5	%

The principal components of deferred tax assets and liabilities are as follows:


	June 30, 2013			July 1, 2012
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	391		$	2,804
Tax credit carryforwards		16,805			15,135
Reserves and accruals		21,527			18,264
Depreciation and amortization		2,796			2,408

		41,519			38,611
Valuation allowance		(7,193	)		(7,307	)

Total deferred tax assets		34,326			31,304
Deferred tax liabilities:
Unremitted foreign earnings		334			334

Net deferred tax assets	$	33,992		$	30,970

Net deferred tax assets are comprised of the following:


	June 30, 2013			July 1, 2012
	(In thousands)
Current assets	$	9,348		$	6,961
Non-current assets		24,978			24,343
Non-current liabilities		(334	)		(334	)

Net deferred tax assets	$	33,992		$	30,970

As of June 30, 2013, for federal income tax purposes, we had net operating loss carryforwards of approximately $10.0 million which will expire in years 2024 through 2033. We had California net operating loss carryforwards of approximately $7.0 million which will expire in years 2014 through 2033.

Also, we had federal research and development tax credit carryforwards of approximately $11.9 million that will expire in the fiscal years 2018 through 2033, alternative minimum tax credit carryforwards of approximately $4.5 million that have no expiration date, and approximately $1.9 million of foreign tax credits that will expire in 2016 through 2019. A total of $0.1 million of the alternative minimum tax credit carryforwards are related to excess tax benefits as a result of stock option exercises, and therefore, will be recorded to additional paid-in-capital in the period in which they are realized. Additionally, for state income tax purposes, we had research and development tax credit carryforwards of approximately $14.2 million that have no expiration date.

As of June 30, 2013, the Company’s foreign subsidiaries have accumulated undistributed earnings of approximately $6.0 million that are intended to be indefinitely reinvested outside the U.S. and, accordingly, no provision for U.S. federal and state tax has been made for the distribution of these earnings.

We have provided a valuation allowance for certain deferred tax assets because we have determined that it is more likely than not that we will not have sufficient taxable income to realize these tax assets. At June 30, 2013, $0.9 million of the valuation allowance was attributable to foreign tax credit generated from fiscal 2007 through fiscal 2009 that may not be utilized before it expires in fiscal 2017 through fiscal 2019. The $0.5 million of the valuation allowance was attributable to a fiscal 2009 short-term investment loss incurred which has a limited carryforward period. For state income tax purposes, we have a $5.5 million valuation allowance related to state income tax credits primarily attributable to research and development credits that are not expected to be utilized.

As of June 30, 2013, we had $16.2 million of unrecognized tax benefits, of which $13.7 million, if recognized, would impact our effective tax rate. We do not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months. Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. During fiscal 2013, 2012, and 2011, we had no interest or penalties related to unrecognized tax benefits recorded to income tax expense.

The aggregate changes in the balance of unrecognized tax benefits were as follows:


	Year ended
	June 30, 2013			July 1, 2012			July 3, 2011
	(in thousands)
Beginning balance	$	16,166		$	16,249		$	15,424
Increase for tax positions of current year		431			571			756
Increase for tax positions of prior years		—			—			617
Decrease for tax positions of prior years		(117	)		(200	)
Lapse of Statute of Limitations		(280	)		(454	)		(548	)
Settlements		—			—			—

Ending balance	$	16,200		$	16,166		$	16,249

We are subject to income tax in the United States and a number of state and foreign jurisdictions. The tax years ended June 28, 2009 and onwards remain open to examination by major taxing jurisdictions in which we operate which include the United States, The State of California and Germany. We ceased operating in Puerto Rico in fiscal 2012. However, fiscal 2009 through 2011 remain open for examination and we are currently under examination in Puerto Rico for fiscal 2010 and 2011.